SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended June 30, 2018
Business Overview: SFL is a Bermuda-based shipping and offshore finance company owning a fleet of vessels and drilling rigs. The company focuses on acquiring assets with long-term charters to high-quality counterparties while divesting older, less efficient assets.

Key Financial Metrics

Note: Net Income includes a one-time impairment charge of approximately $21.8 million related to the sale of three VLCCs.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenue increased by approximately 4.8% compared to Q1 2018, driven by new vessel deliveries and acquisitions.
• Profit Decline: Net income decreased significantly from $24.7 million in Q1 to $15.8 million in Q2. This decline is primarily attributable to a $21.8 million impairment charge on three VLCCs sold subsequent to quarter-end.
• Debt Increase: Total interest-bearing debt rose from approximately $1.44 billion in Q1 to $1.92 billion in Q2, reflecting new financing for vessel acquisitions (including a $50 million bank loan and a $320 million intermediary loan).
• Investment in Associates: The company continues to account for three 100% owned subsidiaries (drilling rigs) as "investments in associates" under U.S. GAAP, contributing $3.9 million in results and $3.5 million in interest income for the quarter.

Guidance, Outlook, and Management Commentary

• Dividend: The Board declared a quarterly cash dividend of $0.35 per share, marking the 58th consecutive quarterly dividend.
• Fleet Renewal: Management highlights an active year of fleet renewal, deploying nearly $900 million in 2018 to acquire vessels on long-term charters. This includes 19 container vessel deliveries in Q2 and the acquisition of three modern 10,600 TEU container vessels in August.
• Charter Backlog: The fixed-rate charter backlog stands at $3.6 billion with an average remaining term of 5 years (nearly 8 years weighted by revenue).
• Market Conditions:
  • Tankers: The spot crude oil market remains soft. Payments from vessels chartered to Frontline Shipping Limited are now linked to spot market earnings as the cash buffer has been exhausted.
  • Offshore: The market remains challenging. A restructuring agreement was reached for two offshore support vessels, reducing immediate cash flow to 50% of agreed hire until end of 2019.
  • Dry Bulk: The market strengthened into Q3, with Capesize rates reportedly above the profit share threshold.
• Strategy: The company maintains an agile, opportunistic approach, targeting assets with limited downside risk and potential for appreciation, while isolating itself from negative cyclicality in specific sectors.

Investor Verification Checklist

• Impairment Impact: Verify the specific book value and sale proceeds of the three VLCCs (Front Page, Front Stratus, Front Serenade) to understand the full impact of the $21.8 million charge.
• Debt Structure: Review the terms of the new $320 million intermediary loan and the $50 million bank loan, including interest rates and maturity profiles, given the significant increase in total debt.
• Offshore Restructuring: Confirm the long-term implications of the 50% payment reduction on the two offshore support vessels and the status of the layup rig (West Taurus).
• Frontline Exposure: Assess the risk exposure to Frontline Shipping Limited, as the cash buffer for base rate payments has been exhausted, linking future cash flows to volatile spot rates.
• Accounting Treatment: Review the "Investment in Associates" disclosure to ensure understanding of why 100% owned subsidiaries are not consolidated and how their cash flows are reported.